Rejoice: Mr. Market Sees GE Isn’t Apple

By Brendan Conway

The tendency of stocks to swing in lockstep, the bugaboo of fund managers, is on the retreat. At least, that’s the picture over the last several months. The phenomenon of market correlation actually increased in February.

But that move leaves us at relatively moderate levels, where investors are again making distinctions between, say, Apple (AAPL), down 19% year-to-date, and General Electric (GE), up 13%.

Whether those distinctions are correct is another matter. But at least stocks are less prone to being dumped en masse one day, only to be greedily bought with both hands the next.

This spot — which happens to arrive as the Dow Jones Industrial Average (DIA) breaks a fresh all-time high — “hint[s] at normalization,” according to Citigroup (C) strategist Tobias Levkovich in a note this morning.

Here’s a chart of how closely the biggest 50 stocks in the S&P 500 (SPY) have tracked eachother the last five years — the blue line. The red line is the index’s performance. The realized correlation of the S&P’s 50 biggest stocks today is around 40% — versus more than 90% near the height of the financial crisis, and less than 10% early this year.

Click through for a closer look:

Citigroup

One interesting feature of this chart: Look how high correlation turned in late 2011 and early 2012. People were worried. And yet the market kept rising.

This is the chief reason that fund managers and especially value investors should hope for periods of high correlation. For months on end, investors were pushing around the market without much heed of the differences between and among companies. Eventually, the differences — in earnings prospects, growth and the like — play out in market prices.

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